California law extends new protections to franchiseesCalifornia law extends new protections to franchisees

California Gov. Jerry Brown signed into law Sunday a bill that extends new protections to franchisees that some observers call unprecedented.

Assembly Bill 525 amends California’s Business and Professions Code to require franchisors to provide written explanations for terminating franchise agreements and to repurchase the franchisees’ assets upon termination. It also gives franchisees more time to correct infractions of franchise agreements and narrows legal reasons for franchisors to terminate them.

Terminating a franchise

The new law extends the amount of time franchisees have to correct infractions of franchise agreements to 60 days, from 30 days. It also changes the wording to specify that such infractions have to be a failure to “substantially comply with the lawful requirements imposed upon the franchisee by the franchise agreement,” rather than any infraction, substantial or otherwise.

According to the amended code, franchisors are still allowed to terminate agreements if the franchisee declares bankruptcy, abandons the business, materially misrepresents himself or herself in ways relating to the franchise, “engages in conduct which reflects materially and unfavorably upon the reputation of the franchise business system,” is convicted of crimes relevant to the franchise, failure to pay franchise fees or other money owed to the franchisor, or if the franchisor reasonably determines that continued operation of the franchise is “an imminent danger to public health or safety.”

Repurchasing of assets

A new section has been added to the code requiring franchisors, upon termination or nonrenewal of a franchise, to buy from the franchisee, “at the value of price paid, minus depreciation, all inventory, supplies, equipment, fixtures, and furnishing purchased or paid for under the terms of the franchise agreement,” not including personalized items.

The section does not apply if franchisees decline a bona fide offer to renew the franchise or if the franchisor does not prevent the franchisee from retaining “the principal place of the franchise business.” Franchisees exiting the market where the franchise was terminated also aren’t required to buy the assets, nor do they have to if the termination is mutually agreed by the franchisor and the franchisee.

Reselling a franchise

The new law also stipulates that franchisees can sell or transfer their franchise to another party if that party is qualified “under the franchisor’s then-existing standards for the approval of new or renewing franchisees.”

Written approval of the franchisor is required, but that approval can only be withheld if the potential franchisee doesn’t meet stipulated requirements.
The franchisor has the right of first refusal.

Franchisee newsletter Blue MauMau called the new regulations the strongest franchise protection rules in the country.

“The law protects franchise owners from franchisors who seek to terminate their business on a whim or from franchisors who desire to take possession of a lucrative franchise without compensating the franchise owner,” editor Don Sniegowski wrote.

The International Franchise Association, which reportedly withdrew its opposition to the bill after negotiating with the Coalition of Franchisee Associations, did not respond to requests for comment by press time. The California Restaurant Association declined to comment.

Contact Bret Thorn at [email protected].
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